Warren David Yu v. GSM Nation, LLC
12293-VCMR
| Del. Ch. | Jul 7, 2017Background
- Plaintiff Warren (David) Yu loaned GSM Nation, LLC $3.5 million across 16 loan agreements (Feb 2013–Sept 2014) at 12% interest, payable monthly and callable on 60 days’ notice.
- GSM paid interest through Dec 2015 but bounced checks in Jan–Feb 2016; Yu demanded repayment Feb 17, 2016; GSM claimed inability to repay and produced financial statements showing insolvency.
- Yu alleges Khattak (GSM CEO, 85% owner) induced the loans by representing GSM would develop an MVNO, but Khattak allegedly routed MVNO activities to a separate entity, US Mobile LLC, and transferred assets to that entity.
- Claims pleaded: breach of contract, fraudulent inducement, equitable fraud, fraudulent transfer, unjust enrichment, and alter-ego/veil-piercing; prayers include rescission, reformation, constructive trust, equitable accounting.
- Defendants moved to dismiss for lack of subject-matter jurisdiction (Chancery) and failure to state a claim; Khattak also moved for lack of personal jurisdiction.
- Court concluded the complaint, viewed holistically, alleged legal (money) relief and insufficient equitable allegations or remedies unique to Chancery; Rule 12(b)(1) dismissal for lack of subject-matter jurisdiction granted; plaintiff may transfer to Superior Court within 60 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Chancery has jurisdiction over claims framed as equitable | Yu contends claims for equitable fraud, unjust enrichment, fraudulent transfer, and equitable remedies place case in Chancery | Defendants argue the complaint seeks money damages for debt and only uses equitable language to invoke Chancery | Held: No Chancery jurisdiction — legal remedy (money judgment) is adequate; equitable labels are a pretext |
| Whether equitable fraud claim is properly pled | Yu asserts equitable fraud based on inducement to lend and diversion of MVNO to US Mobile LLC | Defendants say no fiduciary or special relationship alleged; elements of equitable fraud missing | Held: Dismissed for lack of subject-matter jurisdiction — complaint lacks facts showing fiduciary/similar relationship |
| Whether unjust enrichment invokes equity | Yu pleads unjust enrichment as alternative recovery | Defendants point to contract-based debt and Crosse holding contractual off-the-contract unjust enrichment is legal | Held: Unjust enrichment treated as legal (alternative to contract); does not confer Chancery jurisdiction |
| Whether alter-ego/veil-piercing supports Chancery jurisdiction | Yu alleges Khattak dominated entities, paid personal draws, and transferred assets to avoid creditors | Defendants contend pleadings lack specific, nonconclusory facts showing sham entities, commingling, or lack of corporate formalities | Held: Alter-ego claim insufficiently pled; cannot be used to bootstrap jurisdiction into Chancery |
Key Cases Cited
- McMahon v. New Castle Associates, 532 A.2d 601 (Del. Ch.) (labels and chancery terms do not supplant realistic assessment of whether equitable relief is needed)
- Crosse v. BCBSD, Inc., 836 A.2d 492 (Del. 2003) (unjust enrichment that accompanies contract claims is legal, not equitable)
- Wallace ex rel. Cencom Cable Income P’rs II, Inc. v. Wood, 752 A.2d 1175 (Del. Ch.) (high bar for disregarding corporate form; need facts showing complete domination)
- Sonne v. Sacks, 314 A.2d 194 (Del. 1973) (piercing the corporate veil is an equitable remedy reserved for Chancery)
- Outokumpu Eng’g Enterprises, Inc. v. Kvaerner EnviroPower, Inc., 685 A.2d 724 (Del. Super. Ct.) (alter-ego requires showing corporation is a sham used to perpetrate fraud)
- International Business Machines Corp. v. Comdisco, Inc., 602 A.2d 74 (Del. Ch.) (equity will not permit forum shopping via formulaic invocation of equitable remedies)